Everybody wants a comfortable retirement. It’s never too early to start saving for life after work, but what happens when you are at or near retirement? Should you keep doing the same thing? Or should your retirement strategy change?
Saving money is essential if you want to enjoy your retirement. However, current monetary policies are making many of the traditional savings options unattractive. Interest rates are meagre in the U.S. and Europe, and many low-risk investments produce returns that can’t keep up with inflation. As a result, more retirees need to increase their risk exposure to access better yields.
A Federal Reserve report on the Economic Well-Being of U.S. Households found that only 1/3rd of non-retirees felt that their retirement plans were on track. While traditional retirement portfolios typically consist of a 60%- 40% split between stocks and bonds, retirees will need to review this if they want to afford retirement.
So what are their options?
Are ETFs a Good Option for Retirees?
Low-interest rates and high inflation are big worries for anyone saving for retirement. Bonds were considered solid investments in the past, but their yields are currently too low.
Many retirees are beginning to understand that they will need to up their risk appetite to access the returns they need to be comfortable. While mutual funds are one way to do this, ETFs provide some considerable advantages.
Firstly, ETFs are very tax-efficient. Secondly, they allow investors more flexibility when deciding where to invest their money. Lastly, mutual funds often come with active management fees, which harm returns.
Retirement Investment Mistakes to Avoid
The market has produced stellar results over the years. However, there are times when it takes a dip. For retirees dependent on stock dividends, market downturns can force them to sell some of their shares while the market is low. Keeping cash reserves to cover expenses can help avoid these difficult decisions.
In a recent Vanguard annual survey, they underlined another typical retirement investment mistake. The report showed that the average U.S. stock portfolio is heavily weighted towards U.S. shares. The problem? According to MSCI, the stock market financial data company, U.S. share indexes have only beaten non-U.S. share indexes 51% of the time since 1970. A portfolio of nearer 50/50 would produce better results.
What to Do With Extra Cash?
Many retirees have savings alongside their stock market investment. Having emergency funds is smart, but too many savings will harm your retirement plans because inflation rates outstripped interest rates. Savings earmarked to pass onto children could be best put to work in the stock market.
Current monetary policies are keeping interest rates low. This situation punishes savers and those who invest in low-risk options like bonds. Conversely, it has a favourable effect on the stock market because it is one of the best places to invest money.
Anyone who is retired or close to retirement should consider investing in the stock market. Options like ETFs are a great way to get started due to their simplicity. Additionally, they don’t have investment minimums or excessive charges like most mutual funds.
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Alpesh Patel OBE